The end of the dot-com bubble in 2000 put many new online brokers out of business. Volume tapered off significantly, and brokerage revenue collapsed.

The stock market sludged through a quiet bear market for two years. The online brokers left standing began to cut commissions to steal customers from rivals.

Since then, brokerage commission prices have been on a steady trajectory to zero.

Suddenly, the brokerage world was in a race to the bottom. Stock brokers found themselves on a list of replaceable jobs, like elevator operators and highway toll collectors.

At the same time, technology has also replaced the way we invest. Mobile phone apps have replaced the computer, which replaced the phone.

Just a few years ago, fintech companies like Betterment and Wealthfront showed that you don’t even need to work with a financial planner to plan for retirement.

Simply open an account and fill out a survey pertaining to your investment goals, and let their algorithms do the work.

Lunch Is Never Free

Even though stock trading might soon be free, brokers can generate revenue in a variety of other ways.

They can earn interest on uninvested cash in customer accounts. They also pass through regulatory fees incurred when a trade is placed.

Even though these fees are often smaller than a penny, most brokers unashamedly round up.

Last but not least is the margin rate.

If you want to borrow money from your broker and own more stock than you have cash, the brokerage firm is going to charge you a hefty margin rate. Currently, accounts with $25,000 are paying 8.82% at Fidelity and 9.75% at Interactive Brokers.

Yes, the broker is assuming risk by lending you money to buy more stock. However, with the U.S. 10-year interest rate under 3%, is it that risky when you’ve got automated margin clerks ready to sell?

Brokers like JPMorgan are betting that these rates are set to move higher as interest rates rise. And they’re willing to offer free trades to get you in the door.

Overall, though, the shift toward zero-commission trading is a welcome development for investors, especially ones with smaller accounts.

Regards,

Ian King

Editor, Crypto Profit Trader

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Editor’s Note: I, along with a few esteemed colleagues, publish our insight in our e-letters called Sovereign Investor Daily and Winning Investor Daily. Every day, we send you our very best ideas to help protect and grow your wealth. Sign up below for free.

DisclaimerNothing herein should be considered personalized investment advice. The advice we provide is published generally, is not personal to you and does not take account of your personal circumstances. You should not base investment decisions solely on this document.